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Implications of risk premium shocks in a small and open economy

Author

Listed:
  • José Mauricio Gil-León

    (Universidad Pedagógica y Tecnológica de Colombia)

  • Andrés Felipe Suárez-Cant

    (Universidad Pedagógica y Tecnológica de Colombia)

Abstract

This paper aims to identify the transmission channel of risk premium shocks in different macroeconomic variables. Therefore, a DSGE model for a small and open economy is formulated, which considers the behavior of households, investment decisions by companies, the reaction function of the central bank and the dynamics of the different external variables, such such as the variation of the country’s net foreign assets and foreign trade. The model is calibrated with data from the Colombian economy of the 2005-2017 period. In the simulation results, the persistence of the risk premium shock in the endogenous variables that make up the model is identified, and in particular, outstanding effects of the shock on the exchange rate, the interest rate and inflation are observed. It is concluded that the size of the elasticity of the risk premium to external indebtedness dominates the force with which the shocks affect the economy

Suggested Citation

  • José Mauricio Gil-León & Andrés Felipe Suárez-Cant, 2020. "Implications of risk premium shocks in a small and open economy," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 92, pages 133-172, Enero-Jun.
    • Handle: RePEc:lde:journl:y:2020:i:92:p:133-172
    DOI: 10.17533/udea.le.n92a05
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    References listed on IDEAS

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    1. Eraker, Bjørn & Wang, Jiakou, 2015. "A non-linear dynamic model of the variance risk premium," Journal of Econometrics, Elsevier, vol. 187(2), pages 547-556.
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    3. Martha R. López & Juan D. Prada & Norberto Rodríguez N., 2008. "Financial Accelerator Mechanism in a Small Open Economy," Borradores de Economia 525, Banco de la Republica de Colombia.
    4. Drago Bergholt, 2014. "Foreign shocks in an estimated multi-sector model," Working Papers No 4/2014, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    5. Gelain, Paolo, 2010. "The external finance premium in the euro area A useful indicator for monetary policy?," Working Paper Series 1171, European Central Bank.
    6. Papantonis, Ioannis, 2016. "Volatility risk premium implications of GARCH option pricing models," Economic Modelling, Elsevier, vol. 58(C), pages 104-115.
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    More about this item

    Keywords

    DSGE models; risk premium; interest rate; exchange rate.;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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